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Examples of businesses that could benefit include auto component manufacturers seeking to re-tool or diversify into other industries, food manufacturers investing in new equipment to package new products for Asian export markets and metal fabricators expanding into pre-fabricated housing.

The automotive industry has been especially hard hit by the closure of Holden, Ford and Toyota.

The fund would apply commercial rigour when making investments and offer financing including equity, concessional loans and loan guarantees.

It could partner with the CEFC to invest in energy efficient projects and equipment to reduce a company's energy bills, or the Export Finance and Insurance Corporation to access new export markets with new products.

The Australian Industry Group welcomed the announcement and urged all sides of politics to embrace such a policy approach.

Chief executive Innes Willox said there have long been concerns that Australia's financial system under-caters for innovative and seemingly higher-risk investments by small and medium-sized businesses.

"The measures announced today are an important recognition of the potential for the creation of exciting and enduring jobs, new export opportunities and new domestic business capabilities in Australian manufacturing," he said in a statement.

But Michael Sukkar, assistant minister to the treasurer, claims the money won't be used to help small business, but for Mr Shorten to "reward his union mates".

"You don't help any manufacturer, particularly small manufacturers who are downstream ... by strangling them with higher taxes, less tax concessions and now this union slush fund," he told reporters in Melbourne.

"It will basically say 'unless the union supports you, you're not going to see a dollar out of this'."